Before Judges Dreier, P.g. Levy and Wecker.
The opinion of the court was delivered by: Dreier, P.j.a.d.
 Argued: April 28, 1998
On appeal from the Superior Court of New Jersey, Chancery Division, Middlesex County.
Defendant Leonard N. Perle, the owner of one-half of the stock in Protameen Chemicals, Inc., appeals from a judgment in favor of plaintiff Emanuel Balsamides, Sr., the owner of the other one-half interest, and his sons, directing Perle to sell his stock in this deadlocked corporation for $1,960,500. The Judge further awarded Balsamides $75,000 in punitive damages. Balsamides cross-appeals against Perle and his sons, claiming that he was entitled to counsel fees and that the one-year restrictive covenant imposed upon Perle, which has now expired, should have been extended to a term coextensive with that originally contained in the parties' stockholders' agreement. (When used in the singular, the names Perle and Balsamides or terms plaintiff and defendant shall refer to the fathers).
We will not review in detail the facts of the parties' stormy relationship in the final years they worked together. Suffice it to say that they had built up a successful chemical business by utilizing Perle's technical talents and administrative skills and Balsamides' sales acumen and knowledge of the market. This was a classic case of an inside man and outside man, each doing his job superbly, but each also viewing his job as the more important in the company. Each had two sons who eventually came into the business. Balsamides' sons worked in the field and earned substantial salaries and commissions. Perle's sons started learning the administrative areas, intending eventually to be salesmen, with Perle attempting to see that their remuneration matched that of the Balsamides sons.
The following findings of fact by the trial Judge concerning Perle's wrongful conduct find support in this record. Our recounting of the findings shall not be taken as our independent determination of such wrongdoing, but only that we recognize the scope of appellate review, namely, that findings upon which a judgment is based will not be disturbed if they are supported by adequate, substantial and credible evidence in the record. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974).
The court found: Perle's purposeful refusal or delay in providing technical information requested for plaintiffs' customers; Perle's refusal to provide product samples when requested by plaintiffs' customers; Perle's refusal to stock materials in the company's warehouse that he knew plaintiffs' customers would be ordering; Perle's decision to allow his son Adam to sell carbopol in Florida in violation of Protameen's distribution agreement with B.F. Goodrich; Perle's denial of plaintiffs' access to the company's computer system; and Perle's disparaging treatment of plaintiffs in the eyes of Protameen's personnel and his condoning of similar actions by his sons. All these actions were done, according to the court, in an effort to embarrass plaintiff with his customers. Consequently, the court described Perle's conduct as a breach of his fiduciary responsibility as a co-equal shareholder, which constituted shareholder oppression.
In support of these findings, the court noted that the credibility and the demeanor of the witnesses played an important part, and it cited Perle's "demeanor on the witness stand [which] told a story louder and more clearly than any of the words spoken during the course of this trial. His quest for equality for his sons and his resentment completely blinded him to the practical implications of what he was doing."
We are well aware that the record is not one-sided. Even granting deference to the credibility determinations of the trial Judge, we have seen significant provocations and even alleged ethnic disparagement on the part of Balsamides, which obviously heightened the estrangement of these erstwhile friends and close business associates. The court, however, after first attempting to preserve the integrity of the corporation by appointing a provisional director, determined that the corporation would have to be sold or have one partner buy out the other. In fact, in November 1995, Robert Pettus, one of the corporation's suppliers, offered to purchase the corporation's assets for $7.5 million dollars. He was, however, unable to secure Balsamides' agreement to the purchase. After considering the alternatives, the trial Judge concluded:
It is my judgment that Leonard Perle should be required to sell his interests in Protameen to Emanuel Balsamides. That is the remedy that I consider to be the fair, just, and equitable remedy in these circumstances. The buy-out of one co-owner by the other seems to me to present the greatest possibilities of resolving this matter in the near future, of maximizing the benefit to both parties, and in preserving Protameen and its business to the greatest extent possible....
I find from the evidence that Mr. Balsamides was crucial to the growth over the years. He brought the major accounts and customers into the fold as a result of his contacts in the cosmetic business and his ability as a salesman.... [A]s the business grew, [Perle] ... spent all his time as the inside man, doing the technical work, the administration, and running the office.... I do not intend to demean the contributions of Leonard Perle to Protameen's success. However, the primary reason for its amazing growth lies in the skill with which Emanuel Balsamides handled the sales side of Protameen.
I find as a fact further that Mr. Balsamides is the outward presence of Protameen in the cosmetic industry. When people in the cosmetic field think of Protameen, they think of Mr. Balsamides....
And finally, the decision to permit Mr. Balsamides to buy the interest of Mr. Perle is supported by the conduct of Mr. Perle I outlined earlier.... I should say at the same time that I do not believe the Balsamides group is entirely blameless in this entire controversy. I have heard testimony of alleged wrongful acts on their part. However, none of that testimony had convinced me that there was any wrongdoing on the part of the Balsamides group, that is wrongdoing that was intentional in nature and injurious to the business of the corporation. On the other hand, Mr Perle conducted himself in his vendetta against the Balsamides in a way that was harmful to the business of Protameen, and he displayed little or no regard for the welfare of his own company and the interests of his partner.
There is no question that this decision was consistent with N.J.S.A. 14A:12-7(1)(c). See Bonavita v. Corbo, 300 N.J. Super. 179, 187-88 (Ch. Div. 1996). It is also clear that stockholders in a close corporation owe each other substantially the same fiduciary duty of good faith and loyalty as that owed by partners in a partnership. Muellenberg v. Bikon Corp., 143 N.J. 168, 177 (1996).
These principles and the buy-out order of the trial Judge are not seriously contested by Perle. His challenge to the court's findings relate more to the punitive damage award against him and to some of the considerations of the court in establishing the fair market value of Perle's interest in the corporation. Had the transfer itself been challenged, we have no question that, notwithstanding the lack of express authority in N.J.S.A. 14A:12-7 to order a sale in a situation such as the one before us, the trial court as a court of equity has the power to order such a purchase under exceptional circumstances, such as here, where the only alternative to a buy-out is dissolution. See Brenner v. Berkowitz, 134 N.J. 488, 513 (1993). Parenthetically, we note that the principals of the corporation might in some respects be considered minority shareholders, even though they each own fifty percent of the stock. See Bonavita v. Corbo, supra, 300 N.J. Super. at 187-89.
Perle has argued that three of the various findings we noted earlier did not constitute breaches of fiduciary duty, namely, the alleged abusive treatment of Balsamides and his family, the sale of carbopol in Florida, and permitting shortages in inventory. The mistreatment of a co-stockholder who is also an officer and director of the company, even if allegedly done to protect the interest of Perle's sons, could well be found a violation of the fiduciary standards of honesty and good faith imposed upon Perle, which should have prevented him from placing private interests in conflict with those of the corporation. See Fender v. Prescott, 476 N.Y.S.2d 128, 132 (App. Div. 1984), aff'd, 479 N.E.2d 225 (N.Y. 1985). Even if these three breaches were eliminated, however, the other three determined by the court provide an ample basis to uphold the buy-out determination.
The principal issue in this case is one of valuation. Each party obtained the services of a valuation expert. Balsamides produced Thomas Hoberman, a C.P.A., and Perle produced Robert Ott, a Chartered Financial Analyst. Hoberman appraised the corporation's inventory, relying upon the company's price lists. However, he could not certify the audit because he did not compare the actual vendor invoices with Protameen's own price lists. His inventory valuation of $1,991,943 also was based upon financial statements prepared by the company's accountants for 1990 through 1994 and the first half of 1995, and its tax returns from 1990 through 1994. Although he attempted to interview Perle and his sons, he was denied such an interview. Perle, however, explains this denial resulted from his being suddenly confronted with a request for the interview by Balsamides' C.P.A. and attorney. In that situation he wished to have his own attorney present, but plaintiff would not accommodate the delay.
In any event, Hoberman valued the corporation at $4,176,000, including its main assets: its accounts receivable and inventory. He used negative factors in his valuation, namely, the company's loss of a chemist, Perle, who could provide technical support to the employees and customers, the corporation's reliance on mineral and animal based chemicals which were being phased out by the industry, and the company's purchasing policies which placed a priority on price and not on quality. He also stated that there was a market concentration risk for the company because thirty percent of its sales were represented by its six largest customers.
In computing the fair market value, Hoberman recognized the market, income, and cost approaches, but was forced to reject the market approach because no comparables could be found of a size approximating that of Protameen. He also could not use the income approach because he could not speak with Perle to determine future operating expenses and capital expenditures which were needed to compute a credible anticipated cash flow. He therefore used an excess earnings approach authorized for tax purposes by the Internal Revenue Service in Revenue Ruling 68-609, 1968-2, C.B. 327. He explained that he calculated a percentage return on the average annual value of the tangible assets used in the business, using, at a minimum, the immediate five years prior to the valuation date. That amount was deducted from the average earnings of the business for the time period, and the resulting amount, considered the average annual earnings from the intangible assets of the business, was then capitalized at a certain percentage. As is noted later, this capitalization rate was challenged by Ott.
Hoberman determined the normalized income and the net tangible assets by using the previous six years' data, weighing the immediate past year with a factor of six; the year before that with a factor of five, and so on. Thus, the more recent years were more heavily weighted. He determined the normalized income for the period to be $1,195,659 and the net tangible assets to be $2,786,949. He used eleven percent as the rate of return on net tangible assets ($306,000), and subtracted this amount from the normalized annual income. He then capitalized this modified income figure, using a thirty percent capitalization rate which, when added to the net tangible asset amount, equaled $6,425,000. He then subtracted a marketability discount of thirty-five percent to arrive at a final valuation figure of $4,176,000. This figure, according to Hoberman, also anticipated the restrictive covenant imposed upon the Perles by the trial Judge. He further testified that he did a rough valuation of two similar companies.
Ott disagreed with Hoberman's valuation in several respects. He contested the use of the excess earnings approach which, according to Ott, is the least desirable method of valuation, because it produces a wide range in values and is generally used for relatively small close corporations with relatively stable or flat earnings. In the Protameen case, there had been significant growth over the five previous years. Next, Ott objected to the use of the six-year time period, because the earlier years were before Protameen exhibited significant growth and were not fairly reflective of future earnings. He therefore used a three-year unweighted average. He also testified that Hoberman had mistakenly capitalized earnings before taxes rather than after taxes and had normalized Perle's salary but not that of Balsamides.
Further, Ott objected to the eleven percent rate used by Hoberman to determine the return on net tangible assets and to the thirty percent capitalization rate because of the company's significant positive growth. Ott used rates of nine and eighteen percent respectively. His strongest disagreement, however, was with the application of the thirty- five percent marketability discount which Ott stated was not appropriate when valuing 100% of a company. He testified that at most a nominal discount should be used in such an instance, perhaps a seven percent marketability discount to reflect a brokerage fee inherent in such sales. Ott's valuation of the company therefore was $8,285,000, utilizing both the ...